Course Overview: Creating Value Through Corporate Restructuring

Abstract

Corporate restructuring--far from being a rare or episodic event that happens to "someone else"--is a common and important event in the professional lives of many managers. Since 1980, U.S. public companies with more than a trillion dollars in assets have filed for Chapter 11 bankruptcy or restructured their debt out of court. Over the same period, over 400 companies have spun-off businesses with a combined equity capitalization of more than $200 billion. And by some estimates, as many as 10 million employees have been laid off in the U.S. under corporate downsizing programs.

The "reach" of corporate restructuring is far greater than these statistics simply when one considers the web of relationships between restructured companies and their corporate customers, suppliers, and competitors. Through its impact on firms' market values, restructuring impacts literally millions of investors, lenders and shareholders who provide capital to these firms. The scope of corporate restructuring has also become increasingly global, as heightened competition in international product, capital, and labor markets puts tremendous pressure on companies worldwide to increase their competitiveness and maximize their market value.

"Creating Value Through Corporate Restructuring" (CVCR) at the Harvard Business School is a second-year MBA elective course; materials from CVCR are also used in various executive programs offered at the School. The course explores how corporate managers can create value by restructuring the firm's financial claims and contracts. The course highlights restructurings that address corporate underperformance and financial distress, support changes in business strategy and corporate policy, and reduce information gaps between the firm and the capital markets.

The course was started by Steve Fenster and Ron Moore in 1992, when it was called "Corporate Restructuring." This author assumed full responsibility for the course in 1995, and has developed 10 of the 17 case studies included in the curriculum. Course enrollment currently stands at two full sections of approximately 100 students apiece, and there is a waiting list.

The course is organized around three modules, corresponding to the restructuring of debt contracts, equity contracts, and employee contracts. Examples of restructurings studied in the course include bankruptcy reorganizations and workouts, spin-offs, targeted stock offerings, downsizing/layoff programs, negotiated wage give-backs, employee buyouts, mergers, and restructuring of retiree benefit (e.g., pension and medical) plans. The course features case studies of some of the most controversial and innovative restructurings of the past decade, including the downsizing of Scott Paper Company under Albert Dunlap, the employee buyout of United Airlines, USX's targeted stock offering, and the merger of Chase Manhattan and Chemical Bank.

The author has developed a general framework for thinking about corporate restructuring that can be effectively used to organize and teach the course materials. Analysis of the cases is framed in terms of the following questions: When does it make sense to restructure a firm? What kind of restructuring is most appropriate for addressing the particular problems or challenges the firm faces? To implement a restructuring, what key decisions must managers make, and what barriers must they typically overcome? How much value will the restructuring create? And what actions can managers take to ensure the capital markets fully credit the firm for the value created by restructuring?

Case studies in the course are almost all "field" cases. As such, they incorporate data and insights obtained directly from company management, giving students a unique "inside look" at the corporate restructuring process. Most of the cases come with comprehensive teaching notes. To give students a general context for analyzing the cases, case materials are supplemented with assigned readings from the academic literature on corporate restructuring. The case teaching notes, and a separate "CVCR Course Overview Note," (the full text of which is available for downloading from the SSRN Electronic Paper Collection) highlight the connections to this literature. The Overview Note describes the course framework and the major themes and issues visited in the course; it also provides detailed descriptions of the three course modules and individual case studies.

The course pedagogy emphasizes that restructuring affects firm value because of market frictions and institutional rigidities that make it difficult to recontract when the economic fortunes of a corporation change. These factors include transactions costs, taxes, agency costs, and information gaps between firms and the capital markets. These factors affect how much value restructuring creates, and what kind of restructuring managers should choose. The course also emphasizes that choosing the "right" restructuring approach often requires managers to understand the fundamental business and strategic problems facing their companies.

JEL Classification: G34